A discussion paper on contractual savings in the life industry issued by National Treasury in March 2006 identified changes to commission on savings business and early termination value as Phase 1 of its work programme.

Following consultation, Treasury is now in the process of preparing the amendments to the Long Term Insurance Act regarding commission and future early termination values.According to the Life Underwriters’ Association of SA (Luasa) the maximum commission on savings policies will be 5% of the premium, of which a maximum of 2,5% may be discounted and paid up front, while the balance must be paid as and when premiums are paid (on-going commission).The minimum discount rate is likely to be between 6% and 8% per annum, with a maximum term for discounting to be determined (in the region of 25 years).A special concession will be made for small policies, so that a larger portion of the commission may be discounted, up to a monetary cap, thus supporting emerging brokers.Premium increases will be treated the same as commission at inception, that is, part of the commission may be discounted and the balance must be taken as premiums are paid.If the premium is reduced or stopped within the first five years, there must be a proportional claw back of any commission that was discounted.The commission on single premium policies and risk policies will remain unchanged.The implementation date has not yet been fixed, says Luasa, but it is unlikely to be before early 2008 so as to allow a transition period for intermediaries to adjust their business models and for life offices to change their systems. The LOA has submitted to National Treasury that member offices will require at least nine months once the new commission regulations have been finalised and approved by the Minister.

Future early termination values

The minimum values will be substantially higher than the current minimum early termination values (likely to be not less than 85%).The actual policy fund can be used as the reference fund (subject to conditions). The early termination charge must be phased out in a straight line over a maximum number of years, depending on term. A small fixed termination fee will be allowed for transactions costs, which will assist insurers with the affordability of providing small premium policies.LUASA, says it is pleased that National Treasury accepted the combined intermediary bodies’ strong recommendation that the new commission regime should not be applied to risk business. That is to say, upfront commissions will still be payable on whole life insurance business (policies without any savings element).